What is CapEx vs OpEx?
Capital Expense (CapEx), or capitalization, refers to how an organization expends or depreciates its investment costs over an asset’s lifetime. For an asset to be capitalized, whether that is a product or service, it must bring long-term value to the company as a tangible production of value.
For costs outside of capital investments, the term “expenses” is typically used. An “expense” refers to something an organization spends funds on immediately and cannot be depreciated over a longer time period. This is also referred to as Operating Expense (OpEx).
In the world of Agile software development, the difference between CapEx and OpEx can significantly impact whether Agile continues to grow and scale as a development method of choice. The reason for this consternation resides in how Agile work is planned and completed.
Software development costs are typically capitalized as an attempt to match the development cost against the time period in which the organization receives the benefit to be relieved from incurring them as development costs. Accounting refers to this as the matching principle. But, unlike waterfall or milestone-driven work, Agile software development does not follow linear processes or gates. As a result, financial planners and accountants often find themselves unsure of how to appropriately attribute Agile software development costs to the correct CapEx or OpEx categories, leading many to expense all development efforts upfront (OpEx), making Agile costs appear very expensive to the company and its investors. Obviously, this impacts future Agile development efforts.
As organizations implement Agile practices more widely in software development, capitalizing their efforts accurately becomes paramount to successful fiscal planning and overall Agile transformations. Additionally, knowing what to capitalize versus what to expense impacts an organization’s tax liabilities and profitability.
When finance inaccurately expenses Agile software development costs, it negatively impacts the business by:
- Under-valuing the profitability of the organization by showing Agile assets as expenses without considering their longer-term value to the company.
- Showing negative implications on taxes, resulting in potential overpayment and undervalue of the company within the year in which the expenses took place.
Without careful analysis of capitalization procedures, Agile software development can potentially appear less profitable and more expensive than other methodologies, resulting in a decrease in headcount and budget, as dollars are used to “pay” for Agile expenses.
Your finance organization should have a capitalization policy in which to help guide what expenses can be capitalized. But what if finance had a clear-cut way to cost and capitalize Agile efforts? And what if this method was easier for development teams, too? Keep reading to learn more about the benefits of costing Agile, challenges organizations experience, and how to overcome them with enterprise Kanban and portfolio management.
Agile Costing Demo with Automated Actuals
Watch this short demo to see how Planview capabilities address the Agile team timesheet debacle with automated actuals.Watch the product demo • Agile Costing Demo with Automated Actuals
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